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on Open Economy Macroeconomics |
| By: | Masashige Hamano (Waseda university, Tokyo, JP and Université du Luxembourg (Extramural Research Fellow)); Yuki Murakami (Waseda University, Tokyo, JP) |
| Abstract: | This paper characterizes the optimal government spending policy in a collateral- constrained small open economy, where inefficiencies in borrowing decisions arise due to pecuniary externalities. In this setting, government spending plays a crucial role in maintaining financial stability. When the borrowing constraint binds, the optimal response involves fiscal stimulus, which mitigates the effects of pecuniary externalities and prevents the amplification of the debt-deflation mechanism. The optimal time-consistent policy helps prevent recessionary shocks from triggering financial crises and sharp reversals in the current account. Additionally, when capital controls are optimally combined with government spending, households are incentivized to accumulate precautionary savings more effectively. The welfare gain from capital controls is smaller when government spending is optimally chosen. We demonstrate that a feasible government spending policy, which maintains a constant ratio to GDP, approximates the optimal policy and achieves a second-best outcome. |
| Keywords: | Small open economy; financial crises; optimal government spending. |
| JEL: | F41 F44 E44 G01 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:luc:wpaper:25-02 |
| By: | Joshua Aizenman; Jamel Saadaoui |
| Abstract: | This paper is a case study of the exchange rate adjustments during the first week following the swapping US election results. We compute three measures of exchange rate depreciation: the maximum depreciation during the 1st trading day after November 6 UTC 0:00 to capture the reaction on the FOREX immediately after the news for our sample of 73 currencies against the USD, practically all currencies depreciated sharply at the news. Second, the depreciation after 4 days to capture the reaction of monetary authorities and the global markets to the news; third, the depreciation 1 week after the shock to observe whether some countries have experienced a further depreciation or a return to the pre-shock exchange rate level. In 26 countries out of a sample of 73 bilateral exchange rates against the US Dollar, the depreciation after 1 week was even more pronounced than just after the election. We also find that the correlation between the depreciation rate after a week from the initial news and the ICRG institutional score is positive and significant at the 1 percent level. A multivariate regression for exchange rate movements indicates that after a week, the bilateral trade surplus with the US, and better institutional scores are associated with stronger depreciations. Exchange rate interventions have helped to stabilize the currencies at all time horizons. The exposure to policy changes, measured by EIU’s Trump Risk Index seems to be at play after 4 days. |
| JEL: | F01 F31 F36 F4 F40 F42 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33193 |
| By: | Zhesheng Qiu; Yicheng Wang; Le Xu; Francesco Zanetti |
| Abstract: | This paper studies the design of monetary policy in small open economies with domestic and cross-border production networks and nominal rigidities. The monetary policy that closes the domestic output gap is nearly optimal and is implemented by stabilizing the aggregate inflation index those weights sectoral inflation according to the sector’s roles as a supplier of inputs and a net exporter of products within the international production networks. To close the output gap, monetary policy should assign large weights to inflation in sectors with small direct or indirect (i.e., via the downstream sectors) import shares and failing to account for the cross-border production networks overemphasizes inflation in sectors that export intensively directly and indirectly (i.e., via the downstream sectors). We validate our theoretical results using the World Input-Output Database and show that the monetary policy that closes the output gap outperforms alternative policies that abstract from the openness of the economy or the input-output linkages. |
| Keywords: | production networks, small open economy, monetary policy |
| JEL: | C67 E52 F41 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-03 |
| By: | Isha Agarwal; Wentong Chen; Eswar S. Prasad |
| Abstract: | We provide the first empirical evidence on how media-driven narratives influence cross-border institutional investment flows. Applying natural language processing techniques to one-and-a-half million newspaper articles, we document substantial cross-country variation in sentiment and risk indices constructed from domestic media narratives about China in 15 countries. These narratives significantly affect portfolio flows, even after controlling for macroeconomic and financial fundamentals. This impact is smaller for investors with greater familiarity or private information about China and larger during periods of heightened uncertainty. Political and environmental narratives are as influential as economic narratives. Investors react more sharply to negative narratives than positive ones. |
| JEL: | F30 G11 G15 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33159 |
| By: | Ådne Cappelen; Marek Jasinski; Håvard Hungnes; Julia Skretting (Statistics Norway) |
| Abstract: | Petroleum-producing countries face unique challenges in meeting global emissions targets. As global petroleum consumption declines, these nations must reallocate resources and phase out a historically profitable industry. This study examines Norway's economic transformation resulting from a significant downturn in the petroleum sector, akin to a reverse Dutch disease. Industries linked to petroleum, particularly those supplying factor inputs, must pivot to new markets, while other sectors may benefit from real exchange rate depreciation. Our findings indicate that long-term macroeconomic adjustments are modest, whereas short-term effects can be significant but are largely mitigated through standard fiscal and monetary policy measures. |
| Keywords: | Petroleum industry; Green transition; Dutch disease |
| JEL: | Q32 Q54 E60 F41 |
| Date: | 2024–11 |
| URL: | https://d.repec.org/n?u=RePEc:ssb:dispap:1014 |
| By: | Marcos Cardozo; Yaroslav Rosokha; Cathy Zhang |
| Abstract: | We integrate theory and experimental evidence to study the emergence of different international monetary arrangements based on the circulation of two intrinsically worthless fiat currencies as media of exchange. Our framework is based on a two-country, two-currency search model where the value of each currency is jointly determined by private agents’ decisions and monetary policy formalized as changes in a country’s money growth rate. Results from the experiments indicate subjects coordinate on a regime where both currencies are accepted even when other regimes are theoretically possible. At the same time, we find the acceptance of foreign currency depends on relative inflation rates where sellers tend to reject payment with a more inflationary foreign currency. We also document the presence of learning in shaping acceptance patterns over time. |
| Keywords: | international currency, monetary policy, inflation, experimental macroeconomics |
| JEL: | C92 D83 E40 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:pur:prukra:1351 |
| By: | Kris James Mitchener; Kirsten Wandschneider |
| Abstract: | The Great Depression is the canonical case of a widespread currency war, with more than 70 countries devaluing their currencies relative to gold between 1929 and 1936. What were the currency war’s effects on trade flows? We use newly-compiled, highfrequency bilateral trade data and gravity models that account for when and whether trade partners had devalued to identify the effects of the currency war on global trade. Our empirical estimates show that a country’s trade was reduced by more than 21% following devaluation. This negative and statistically significant decline in trade suggests that the currency war destroyed the trade-enhancing benefits of the global monetary standard, ending regime coordination and increasing trade costs. |
| Keywords: | currency war, monetary regimes, gold standard, competitive devaluations, “beggar thy neighbour”, gravity model |
| JEL: | F14 F33 F42 N10 N70 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11589 |
| By: | ES-SANOUN Mohamed (USMBA - Université Sidi Mohamed Ben Abdellah); Zaynab Hjouji; Ziad Bousraraf; Benboubker Mounir (USMBA - Université Sidi Mohamed Ben Abdellah); Mahouat Nacer |
| Abstract: | Considering the vital role of the tourism sector in the economy, and the intense competition between nations to attract large numbers of tourists, nations are seeking to ameliorate their competitiveness in order to boost their position internationally. In this context, it is essential to determine the main factors of international tourism demand, and with this in mind, this article examines the impact of the real effective exchange rate on international tourism flows to Morocco over the period 1995-2023. We apply the Vector Autoregressive (VAR) model and the Granger causality test to analyze this impact. In addition, we have introduced other control variables (inflation rate, gross domestic product per capita, carbon dioxide emissions) for two reasons: firstly, to ensure the robustness of the results, and secondly, to account for other factors that may affect international tourism demand in the case of Morocco. Our results show that there is a negative relationship between the evolution of the real effective exchange rate, the inflation rate, carbon dioxide emissions and international tourism flows in Morocco, whereas gross domestic product per capita has a positive impact on the evolution of international tourism demand. In our judgment, this study can also guide professionals and policymakers in the formulation of policies and strategies associated with the development of the tourism sector, to improve Morocco's position in this area. The practical implications of these findings suggest that policies aimed at stabilizing the exchange rate and managing economic and environmental variables could enhance Morocco's attractiveness as a tourist destination. |
| Abstract: | Compte tenu du rôle vital du secteur du tourisme dans l'économie et la concurrence intense entre les nations pour attirer un grand nombre de touristes, les pays cherchent à améliorer leur compétitivité afin de renforcer leur position à l'international. Dans ce contexte, il est essentiel de déterminer les principaux facteurs de la demande touristique internationale. Cet article examine donc l'impact du taux de change réel effectif sur les flux touristiques internationaux vers le Maroc durant la période 1995-2023. Nous appliquons le modèle Vecteur autorégressif (VAR) et le test de causalité de Granger pour analyser cet impact. De plus, nous avons introduit d'autres variables de contrôle (taux d'inflation, produit intérieur brut par habitant, émissions de dioxyde de carbone) pour deux raisons : premièrement, assurer la robustesse des résultats, et deuxièmement, tenir compte d'autres facteurs pouvant affecter la demande touristique internationale dans le cas du Maroc. Nos résultats montrent qu'il existe une relation négative entre l'évolution du taux de change réel effectif, le taux d'inflation, les émissions de dioxyde de carbone et les flux touristiques internationaux au Maroc, tandis que le produit intérieur brut par habitant a un impact positif sur l'évolution de la demande touristique internationale. À notre avis, cette étude peut également guider les professionnels et les décideurs dans la formulation de politiques et de stratégies liées au développement du secteur touristique, afin d'améliorer la position du Maroc dans ce domaine. Les implications pratiques de ces résultats suggèrent que des politiques visant à stabiliser le taux de change et à gérer les variables économiques et environnementales pourraient renforcer l'attractivité du Maroc en tant que destination touristique. |
| Keywords: | Tourism Receipts, Real Exchange Rate, Tourism Demand, Vector Autoregressive (VAR) |
| Date: | 2024–10–29 |
| URL: | https://d.repec.org/n?u=RePEc:hal:journl:hal-04764091 |